Council members: Fraud hotline worth the effort

A hotline that Palo Alto set up on a trial basis last year to give City Hall whistleblowers a tool to report fraud, waste and abuse should be kept in place permanently, a City Council committee decided Tuesday night, April 9.

The Policy and Services Committee voted 4-0 to endorse a recommendation from City Auditor Jim Pelletier to retain the city's Fraud, Waste and Abuse Hotline, which is limited to city employees and run by a third-party vendor to ensure anonymity. Since the city established the hotline last spring, it has been used for complaints six times, according to Pelletier's report. Three of those cases are now closed, with two complaints found to be unsubstantiated and a third one involving an inquiry that has been completed.

The other three cases remain open, with investigations in progress. Two of these involve allegations of bribery or kickbacks; the third is listed as "theft of time." Pelletier said he couldn't comment on the substance of the allegations, citing labor laws and the fact that the investigations are ongoing.

"We don't know if they're true or not at this point," Pelletier told the Weekly, adding that if any of these allegations are substantiated, they would be discussed in a future report.

At least one of the open cases was complex enough to require the assistance of an outside firm. Pelletier said a committee of top managers, including himself, City Manager James Keene and City Attorney Molly Stump, considered the complaint and decided to hire an investigator "to do some initial steps and say if there is enough to move forward to the next step."

While cities are not required to have such hotlines, most have adopted them as part of broader ethics programs. These hotlines, he said, "have become the de facto standard for organizations in their establishments of comprehensive (ethics) programs." In 2008, California adopted legislation that allows local city auditors to establish and manage such hotlines, according to Pelletier's report.

Federal guidelines also urge hotlines or other systems that allow anonymous complaints. The Federal Sentencing Guidelines for Organizations, which were designed to promote effective ethics programs, recommend that organizations "have and publicize a system, which may include mechanisms that allow for anonymity or confidentiality, whereby the organizations' employees and agents may report or seek guidance regarding potential or actual criminal conduct without fear of retaliation."

Pelletier also cited a finding by the Association of Certified Fraud Examiners that American organizations lose about 7 percent of annual revenues to fraudulent activity. The association recommended establishing hotlines as a mechanism to detect fraud.

Although in his report Pelletier outlined the costs in terms of "significant amounts" of staff time that investigations can engender, and delays to other city work that would result, he said Tuesday, "I think there is only upside. And the risk of not having a hotline in place is that we could miss some bad behavior that should not go unnoticed in the city."

The number of complaints that Palo Alto has received thus far is in line with other cities of similar size. The hotline comes with an annual cost of $2,940.

All four council members agreed that the city should keep the hotline. Councilwoman Liz Kniss said it may deter wrongdoing.

"If it (the hotline) does exist, it's a reassurance to the entire organization," Kniss said.

This story contains 553 words.

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